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CIT: Update on Survival, Tax Deal With Fed and Scherr Settlement

August 17, 2009


There has been a lot of news and updates related to the troubles of embattled finance giant and factoring facilitator, CIT.

Survival Plans and Probability:

According to the Wall Street Journal:

CIT agreed to submit two separate plans to the Fed in coming weeks, the company said on Thursday. One would give a road map for maintaining sufficient capital and another would outline ways CIT plans to improve its overall financial condition. Additionally, the commercial lender has agreed to give the Fed a say over dividend payments, debt and stock purchases.

Marketwatch has added to the news:

[CIT] has adopted a tax benefits preservation plan that will protect its ability to use net losses and other tax assets. CIT said in a statement that the plan discourages any person or group from taking a 5% or more stake in the firm, which could lead to loss of its tax assets.

Reuters is reporting that CIT successfully completed its tender offer for the $1 billion dollars of outstanding debt that was maturing today, which means that it was able to pay for the bonds that matured today. In order to make sure that CIT could pay the debt that was coming due today, it offered the bond holders 82 and then 87 cents on the dollar for the paper. This essentially buys the company more time to restructure and figure a way out of its predicament before a court-ordered bankruptcy. If CIT would not have been able to pay the bond holders today (i.e. the debt obligation) the company would have gone bankrupt.

The Associated Press, taking a different perspective on toady’s news, is focusing on how even though the share price is up today the credit spread for the notes are widening, which shows that bond traders (i.e. those that focus on buying and swapping corporate debt) feel that the company is still not in the clear and that loaning CIT money at this point is a fairly risky venture.  The share price increase would indicate that people, who buy and hold the equity of the company, feel the bond payout gives the company more time, which combines with the Fed arrangement to have the situation improve for CIT from before.

Scherr Settlement

An incredibly important precedent for the garment industry and their Factoring relationship with CIT ended with an out-of-court settlement last week.  This will allow Scherr, a small clothing company based in New Jersey, to be freed of their Factoring contract and seek a new business partner elsewhere. CIT has done a great job of keeping this from becoming a bigger story in the press.

Reuters, one of the few groups to report on the story, outlines the settlement details it knows:

Under the settlement, CIT gave in to its client’s demands to be freed from its contract, the New York Post reported earlier on Friday, citing sources. Haroutunian told Reuters last week that the parties were in settlement talks but would not comment on the nature of the settlement.

Since Scherr sued CIT, numerous apparel companies have been mulling similar court actions, the paper quoted industry insiders as saying.

Scherr, based in Livingston, New Jersey, has said in court documents that CIT has not been able to give it the assurances it needs that it will hold up its end of the factoring agreement it signed earlier this year. Scherr had asked the court to terminate that agreement.


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